The Complete Guide to HMO Property Investment

HMOs, or houses in multiple occupation, have been a proven investment opportunity for many years. With an estimated 475,000 HMO properties operating throughout the UK, it is no doubt that the HMO investment market is as strong as ever.

However, investing in HMOs can be very to different to investing in standard residential buy to let properties. This often makes investors without experience in HMO investment hesitant to enter the market.

This is why, we’ve put together a complete guide on HMO property investment to outline the advantages and disadvantages as well as the primary things that should be considered when looking to invest in HMOs.

What are HMOs?

HMO stands for “House in Multiple Occupation”, which can refer to a wide range of property types. The most common types of HMO are shared houses, private halls of residence, and hostels. However, other types of HMO can include:

• Buildings that contain numerous bedsits that share some facilities.
• Lodgings.
• Buildings that contain flats with their own facilities but that are not self-contained.
• Refuges.
• Blocks of converted flats.
• Employee accommodation.

Are HMOs a good investment?

HMOs have long been a staple of many investors’ portfolios due to their highly attractive investment features and high returns. However they also offer their own set of unique challenges.

Advantages of HMO property investment

HMO properties offer excellent advantages for investors offering high demand as well as excellent yields. These advantages are created by the fact that, especially in cities and student areas, there is a large market for affordable housing creating a constant stream of demand for HMOs in these areas. While the increased yields offered by HMOs are created by the fact that each room is rented out individually therefore generating higher levels of income from a single property.

HMOs also offer investors fewer void periods due to the fact that, while one unit may be empty, the other units may still be occupied by paying tenants and generating income while the empty units is on the market.

Disadvantages of HMO property investment

Despite the higher yields, demand, and fewer void periods, HMOs have a number of disadvantages as investments which can put some investors off investing in this type of property.

One of the primary disadvantages of HMOs is the strict legislation that is associated with them. HMOs require a license in order to be legally let to a tenant, and some may even require planning permission. There are few different licenses that apply to HMOs and choosing the right one depends on the type of HMO that you own.

HMOs also require a higher upfront cost when compared to a regular buy to let properties. This is often due to the fact that, more often than not, the units within a HMO are rented out fully-furnished therefore increasing the upfront cost of the property for an investor.

HMO licenses explained

In order to let rooms of a HMO investors will require a license, if a property requires a license and doesn’t have one it is considered a criminal offence and offending landlords can face an unlimited fine.

There are 3 different types of HMO license; Mandatory Licenses, Additional Licenses, and Selective Licenses. However not all HMOs require a license so it’s important to remain knowledgeable on the applicable legislation.

It also important to note that landlords will require a license for each of the HMOs that they own as the license applies to the property, not the landlord.

Mandatory Licences

HMOs that are occupied by five or more people, making up at least two households require a Mandatory License. There are exceptions to this rule, for example, if 5 or more tenants are located in individual flats within a purpose-built flat of three or more self-contained flats (for example large flats inside large blocks, such as student housing).

Properties that fall under mandatory licensing a required to meet certain standards for the number of people living within the property. These standards relate to room sizes, the number of shared facilities per person, as well as ensuring fire safety measures are adhered to. Checks may also be carried on landlords and/or property managers to ensure that they are “fit and proper” and do not have criminal convictions.

Additional Licenses

Additional licensing for HMOs is at the discretion of the local council and can vary on a case-by-case basis. This type of licensing exists to protects tenants of properties not covered by the mandatory licensing which may suffer from poor management or unsafe conditions.

There are a number of exceptions to this type of HMO licensing and no centralised policies so it’s important to check the local council’s website to find out whether your property requires an Additional License.

Selective Licenses

Selective licenses are also at the discretion of the local council and can affect all types of rental property, regardless of the size or number of occupants. For example, this type of license may be applied by a council that is concerned about conditions for tenants within a certain street, ward, or borough.

If you’re unsure whether your property needs a HMO license, you should contact the local council and obtain clarification in writing.

How to invest in HMOs

Investing in HMO property is much like investing in any other kind of property. From considering the benefits and drawbacks to choosing the ideal location for your investment. However, with every type of investment property presenting different considerations it is still important to understand how to get into the world of HMO investment.

Consider the pros & cons

One of the most important things to do when looking to invest in HMOs is to consider the pros and cons of HMO property. As mentioned previously, HMOs can offer investors much higher yields than a standard residential property due to their capability to provide multiple revenue generating units from a single investment. However, they also require a good understanding of the strict legislation that surrounds them.

When looking to invest in this type of property, you must consider both sides in order to determine if it is right for you. If you don’t have the funds to invest in something with a high cost of entry (such as a HMO) you may be better suited to residential or student property investment. But if you’re seasoned investor and are prepared to navigate the legal landscape of HMOs then they could be an excellent opportunity.

Set a budget

While even entry level HMOs can come at a high cost, it’s still important to set a budget as larger HMOs can sometimes come in at more than £1 million (depending on other factors such as location etc).

By setting a budget that is within reason you can immediately weed out any unsuitable investment prospects that are outside of your price range. This will also allow you to narrow down where you’ll likely be able to afford to invest as well as whether a HMO is the best option based on what you can afford.

Decide on a location

As a property investor, you may be tired of hearing the old location trope every time you look into investing in a new type of property. However, it is an important consideration to make regardless of the kind of property you’re investing in.

When choosing a location for your investment you need to think about a number of different things. One of the most important is the level of involvement that you, as the investor, will have in the management of the property. If you wish to manage the property yourself you will likely benefit from investing closer to home. However, depending on where you live in the UK, the yields that properties can provide may be higher elsewhere which could require you to hire a management company to run the property for you.

Finding a balance between how involved you want to be in the management of the property and the level of return that you require from the property will help in deciding where you should invest.

Find your HMO

The final, broad, step in investing in HMOs is to find a property that matches your parameters. There are plenty of places you can use to find a suitable HMO property such as the big online property portals or even a specialised property investment company (like us!).

During this step it’s imperative that you comb over the previous considerations that you have made to ensure that investment is right for you. This is because if the property doesn’t provide the right returns you may find yourself with an investment that isn’t making you money.

Best areas for HMO investment

Manchester

Manchester offers a thriving economy, with a large population of students and young professionals, creating a demand for affordable housing. This kind of property market creates the perfect environment for HMO investment as it reduces the worries that investors may have about demand for their property.

Additionally, the average property prices in Greater Manchester are roughly 20% lower than the national average which can create an opportunity for investors to snag themselves a good deal.

Birmingham

Demand for affordable housing in Birmingham is constantly growing due to the young population (~40% being under 25). This is in large part due to the large number of students who study in the city.

Additionally, Birmingham offers young professionals with the opportunity to start their careers with a healthy business landscape. These factors all contribute to Birmingham being one of the nation’s HMO investment hotspots.

Liverpool

Neighbouring Manchester, Liverpool has seen large-scale investment over recent years making the city an exciting prospect for students, young professionals, and investors alike. With average house prices in the area being sub-£200,000 it creates an opportunity for investors looking to get into HMO property while also outlining the landscape and high demand for affordable housing in the area.

Leeds

According to Leeds County Council, Leeds offers investors the fastest growing economy in the UK. This is exacerbated by the large banking and finance sector present in the city which attracts young professionals to city further generating demand for affordable housing such as HMOs.

City also sports a good student population of around 39,000 students. This makes investing in student HMOs in the area another lucrative prospect for potential investors.

Invest in HMO property

Want to invest in HMO property? Here at Pure Investor we have a wide range of HMO properties available for investors. Browse our available properties on our website today!

If you want to speak to one of our property experts, feel free to call us on 0161 337 3890 or email enquiries@pureinvestor.co.uk.

Why choose Pure Investor for HMO property

The key to the success and growth of Pure Investor in recent years has been our location on the outskirts of Manchester. Strategically located to offer all our consultant’s easy access to Manchester, Liverpool, Sheffield, and Leeds, we are regular visitors to all the major property developments within the key Northern Powerhouse destinations.

We are passionate about the growth and development within these locations, ensuring our consultants have a high level of expertise regarding the development opportunities within these key growth areas. For this reason, many investors choose to speak with Pure Investor first when considering property investment in the North England.

We genuinely believe in working with our clients, providing a high quality of service and information, allowing our clients to make their decision on a more informed basis. As a result of this, an increasing number of investors are choosing to return and utilise our services on an ongoing basis. This is something we are incredibly proud of, and which we are looking to continually improve on in the future.

If you are considering in investing in a property in the North of England, and don't fancy the 'hard sell' approach, please feel free to get in touch on either enquiries@pureinvestor.co.uk or call 0161 826 4606.

We look forward to hearing from you!